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The CEOs of Silicon Valley’s largest hospitals sat down to discuss health care reform and the state’s impact on construction projects.

The Business Journal sat down with the CEOs of four local hospitals to discuss the controversial topic of federal health care reform, the economy, and the state’s budget impact on their industry. Here is an edited version of what James Dover of O’Connor Hospital, Bill Piché of Good Samaritan Hospital, Kenneth Graham of El Camino Hospital and Kim Roberts of Santa Clara Valley Health & Hospital System had to say.

Business Journal: How is health care different in the valley from other places?

Roberts: This valley is well-known as a valley of innovation, and the same can be said about health care. But there’s also an area that’s fairly thin in terms of health resources. We are the fifth-lowest bedded community in the United States. There are only two burn trauma centers north of Los Angeles. For spinal cord injury and head injury, we have a nationally recognized center that’s a rare resource. You don’t have to go too far, though, where that’s not the case. For example, in the area of trauma, drive safely. Because if you’re driving through Santa Cruz, Monterey, San Benito and some of those counties, there is no trauma center in any of those counties.

Piché: This is the most mature managed care market I’ve worked in my career. Managed care has tended to suppress physician incomes. At the same time, the cost of living here, particularly housing, has gone through the roof. So you’ve got this compression of the ability to earn a reasonable living versus the cost of living here.

Dover: One difference is Kaiser is so prevalent. Kaiser is a closed system so it basically takes a portion of the population and keeps it within its system, and the other systems provide care to the rest of the population in the community. The other piece that I find unique is we’re the 50th worst-paid state in the nation when it comes to hospital reimbursement for Medi-Cal services. Over the last four years, the shortfall that we’ve had to subsidize is about $27 million.

Graham: What’s particularly interesting about the Bay Area is the diversity of the populations we take care of. We have ethnicities of all various types, of all cultural expectations and norms and perceptions. We’re also far more resourced than other places in the country, and we can deal with people who are developing Medi-Cal devices, bioscience and genetics. We have a lot of automation companies here. We can have conversations about how to do new things. I wouldn’t say it is necessarily a fun place to work because of regulations. We have a lot of regulations. When we checked our building, we had over 120 government agencies that will certify this hospital we’re opening.

BJ: What are problems that need to be addressed in health care reform?

Roberts: A lot of the reform area has been on the issue of coverage. Really, at its simplest level, I think of it as three pillars: Coverage is one, access is a second, and cost is a third. Access comes in a couple of forms. For example, in this community, there’s 250,000 people who have Medi-Cal or some kind of low-income health insurance. So they have coverage, but they currently have little access because few physicians in this community will take Medi-Cal payments because they’re too low.

A second example is in Massachusetts. A couple of years ago, Massachusetts enacted universal coverage. They’ve managed to provide coverage to 97 percent of Massachusetts residents. Now that they have coverage, they can deal with those health care issues they’ve been neglecting. So the system has been overwhelmed by a huge demand for health care services. So that’s another manifestation of access.

The third piece in the cost arena is also about how do we really look at health as well as health care. How do we manage chronic diseases, how do we keep people healthy so that they don’t have to go to a hospital that’s expensive?

Piché: I applaud the idea of health care reform. I think the biggest weakness in what has gone on so far is it’s not really reform. It’s basically an issue regarding health care financing. Real reform involves a broad spectrum of issues: physician availability, malpractice reform. There’s been no significant discussion about best clinical practices and using those as a way to reduce consumption and demand for services.

BJ: Are there ways to slow health insurance increases?

Dover: Price elasticity is a wonderful economic theory – it works. And we all know how price elasticity works if any of us have kids in college. If they have to pay a portion of the gas, guess what? They get really fuel-efficient. I think the same goes for employer-based premiums. Say we’re going to pay only 50 percent of your premiums. If you are within your weight guidelines in terms of BMI, we’ll put another 10 percent on the table. If you don’t smoke, there’s another 10 percent. If you don’t drink alcohol, there’s another 10 percent. And so you can build up to a higher coverage level. You have to incent for certain types of behavior.

Piché: One of the things that needs to be included in health care reform is the whole notion of best practices and evidence-based medicine. You don’t go immediately from “I have chest pain” to “I’ve just had three bypasses in cardiac surgery.” Kaiser I think is one example of a system that has taken a pattern of practice and really tried to make some improvements in how health care is delivered. I think if we’re going to be viable financially in the future, community hospitals like Good Sam are going to have to adopt through our Medi-Cal staff these kinds of practice patterns, or the affordability is just going to reach unsustainable levels.

BJ: Is there an electronic records system that can be shared among the hospitals that’s portable and secure?

Graham: Not today. We have about five major companies that are providing hospital-based automation in the country right now. There’s a lot of small companies that are trying to provide automation of various kinds. At our hospital – we’re a modest-sized organization – we have over 140 software programs running at any given minute. I don’t think it’s practical or realistic to think we’re going to replace all the computers in the country and put in a new system. I think that automation is going to take the pathway of the cell phone. Our hospital is operating with computers in a way that’s very much like cell phones in 1994. You don’t own your number, when you change vendors, it’s expensive, and you pay by the minute. In the future, I think you’re going to have portability in your number, minutes are going to be free, it doesn’t matter which cell phone or computer you’re using, or which hospital you’re at, that information will be available nationwide, for free, instantaneously, and you’ll be able to go from state to state and keep your number. So we’re probably 10 to 15 years from seeing that kind of portability.

Roberts: Trying to automate health care is a lot more complex than it sounds. One of the big issues and one of the more attended to issues is privacy and confidentiality. Because if you happen to be vacationing in Florida and just got hit by a bus, you’d like them to know you have a steel hip and diabetes. In those kinds of moments, you want your information to be readily available. But if it’s readily available for those purposes, how do we make sure it’s not available for the wrong reasons?

Dover: My only comment on the IT is, health care tends to lag behind the other industries when it comes to IT. Here we are in Silicon Valley and we really don’t have a regional health information exchange that can create information flowing back and forth between physicians’ offices, clinics, hospitals, and insurance companies. We’re going to a single electronic health record across our entire system. That’s great. But when you look at the physician community, the 500-plus physicians in the community, it’s every version of electronic Medi-Cal records if they happen to have it. To say there’s going to be one system just isn’t going to happen. We have to find a way to have them all talk to each other.

Piché: The key connection is interconnection, in terms of them being able to talk to each other, one standard. I’d agree with my colleagues that we are woefully behind in terms of using technology to interconnect us. I’d also disabuse the media of the notion that having an electronic health record is going to be an important part of reducing cost increases in health care. It’s important in terms of infrastructure, education, safety, but it’s not in the intermediate term going to meaningfully reduce health care costs.

BJ: How is building a hospital here in California different than, say, Texas?

Piché: We have 170 hospitals in HCA throughout the United States. My colleague in Texas has an idea about adding a wing or a floor or a service in September. Chances are that unit, even if it has to be constructed from scratch, will be open and in operation by a year from now, maybe 15 months at the outset. In California, we’d probably just be to the Office of Statewide Health Planning and Development drawing stage. OSHPD basically does all the design of and approval of the designs for health care facilities based on seismic standards more than anything. The time lag that is involved in bringing a project to fruition not only is very costly, but delays the service or resource from getting into the market. With the new seismic standards and with the state furloughs, OSHPD is going to fall further behind. We need to develop these facilities. Santa Clara County is underbedded relative to the population. Why can’t licensed architects and engineers design our health care facilities? There are standards nationally. Why do they have to be basically designed by the state of California?

BJ: How does the economic slowdown impact a capital project that might start three years from now?

Graham: Finance is the big problem. Money is free right now, and it’s the banks that are charging the interest rates 6, 7 percent. In California, construction costs are averaging about $2 million a bed today, and the projections for Stanford are maybe $3 million a bed. And it can take at least seven years to build a hospital.

Roberts: Health care is in such a state of flex yet you see all this construction going on. How do those two things go together? In California, there’s seismic regulations that come 2013, you have to be life-safe, which means after a giant earthquake, your people need to be able to exit your building safely. And then by 2030, you need to be able to continue to operate as hospitals. That’s fueling a lot of the construction you see, including in our circumstance. We are in the market at a perfect time from a construction perspective in that costs right now are lower than they have been, but also because it creates jobs for this community. We have an $840 million project that’s creating jobs.

BJ: How have the fiscal problems with the state affected your hospital?

Roberts: To say we’ve been impacted by the state is a mild statement. If our costs are $1,000, how much does Medi-Cal pay? The answer is $500. And it’s actually gotten worse. California is 51st worst in the nation – I think we’ve passed Guam or Puerto Rico. So the federal reform agenda is critically important to how health care unfolds in California because the state of California cannot do it. It doesn’t have the money, it doesn’t have the staff support. You may have seen as part of the state budget this year more cuts to the safety net have been put on the table. There are cuts to mental health, cuts to public health, AIDS programs. The state has essentially proposed the elimination of all AIDS funding. The alcohol and drug program funding was slashed. That’s on top of the $106 million that I’ve already reduced.

Piché: The service cutbacks that Kim mentioned, they resonate through the community. If Valley Medi-Cal Center has to reduce their behavioral health services capability, then those patients are going to go somewhere, and where they’re going to go is to providers like Good Sam that maintain that service. The other big issue we’ve seen, and again this goes to Medi-Cal, is a huge escalation in the amount of funding that Good Sam provides to support indigent and Medicaid reimbursement to our doctors in the emergency room. And that is a compensation that’s grown at our hospital. Twelve years ago, it was less than $300,000 a year. This year it will be over $5 million.

Meet the panel

James Dover, CEO, O’Connor HospitalAppointed: 2009Previous experience: CEO of St. Anthony North Hospital in Colorado; president and CEO of Lourdes Health Network in WashingtonEducation: Master’s in hospital administration from the University of Minnesota; bachelor’s in bacteriology from the University of IdahoAbout O’Connor Hospital: A 358-bed Catholic community hospital that is a member of the Daughters of Charity Health System, a system of six California hospitals

Kenneth Graham, CEO, El Camino HospitalAppointed: 2006Previous experience: Former president and CEO of Overlake Hospital Medical Center in Washington; former assistant executive director at Long Beach Community HospitalEducation: Bachelor’s degree in public health and master of public health degree in hospital administration from UCLAAbout El Camino Hospital: A 542-bed, nonprofit hospital operating in Mountain View and a new location in Los Gatos

Bill PichÉ, CEO, Good Samaritan HospitalAppointed: 1997Previous experience: 30 years in health industry, also former chairman of the board of the California Hospital Association and the Hospital Council, former member of the California Health Facilities CommissionEducation: Bachelor’s and MBA degrees from University of Oregon and a master’s of public health from UCLAAbout Good Samaritan: Owned by HCA, payroll of more than 2,000 employees

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